Tuesday, April 27, 2010

In Citibank, N.A., v. HS Index No. 101954/2009, Supreme Court Justice Judith McMahon dismissed a suit which purportedly sought to enforce a note against Defendant in the amount of $495,000.00 Dollars. But there’s a little problem—no such note exists. In his motion to dismiss Robert Brown, Esq., the attorney for the Defendant pointed out that the Citibank, N.A., was attempting to enforce an instrument that the Defendant never actually executed. In this case, the Defendant executed a home-equity line of credit which is not memorialized by a note, as for instance in a traditional home mortgage, since the principal loan amount of a line of credit fluctuates in a manner similar to a credit card.

Even more disturbing is the apparently false affidavit of service submitted by Citibank’s counsel, Foster & Garbus, Esqs., of Farmingdale, New York. An affidavit of service is evidence that defendants received sufficient notice for a law suit to proceed. Without proper service, defendants, more often than not, find out that a lawsuit had been commenced only after a judgment is entered against them.

Foster & Garbus is one of the largest debt collecting law firms in New York State and is alleged to have abused serving process in a lawsuit instituted by Attorney General Andrew Cuomo for “Sewer Service.” The affidavit of service proffered by Foster & Garbus is this case is yet another example of such abuse.

Attorney General Cuomo has made an example of Forster & Garbus in order to put all law firms engaged in high-volume debt collections (also know as “foreclosure mills”) on notice that they are responsible for the conduct of the companies they use to serve complaints and other legal documents. Law firms cannot turn a blind-eye to the abuses perpetrated on their behalf. The Attorney General’s Office has made two press releases on this matter, dated April 14, 2009 and July 22, 2009 where Cuomo notes that Forster & Garbus LLP “relied on legal papers… that it knew or should have known were false.”

“Sewer service” is the term used when the process server states in an affidavit that he served the defendant when he did not. When a defendant fails to respond to a law suit, as is so often the case in collection matters, the plaintiff wins by default. Armed with a default judgment, a creditor can garnish the defendant’s wages or bank account.

Sewer service is worse today than ever before. In 1986, 48,000 default judgments due to sewer service were entered annually in New York City. Today, 300,000 debt collection suits are filed annually in New York City of which more than 80% result in default. The majority involve debt collectors who pay process servers as little as $5 per service which leads to sewer service.

Because sewer service undermines the legitimacy of the judicial system while preventing defendants from raising legitimate defenses, it is of great concern to judges, the Department of Consumer Affairs (DCA), public interest lawyers and the media. Indeed, Administrative Judge Fern A. Fisher of the Civil Court of the City of New York laments that “many defendants” are not receiving notice from process servers.

When a process server actually attempts service in accordance with the law, he is able to personally serve the defendant about 40% of the time. This finding was made by the undercover detective who worked as a process server in 1986. When one examines affidavits of service involving debt collectors, personal service is rarely made. Indeed, South Brooklyn Legal Services examined 324 affidavits of service related to eight process serving agencies and found a highly suspect personal service rate of 2.73%.

Acknowledging these defects among others, Justice McMahon dismissed the lawsuit brought by Foster & Garbus against the Defendant herein. This is the second time Justice McMahon has thrown out such a case by Foster & Garbus—see Citimortgage, Inc., v. Maria Gil, Index No. 100830/2009. Maria Gil was also represented by foreclosure defense attorney, Robert E. Brown, Esq.

Justice Judith McMahon is an Acting Supreme Court Justice presiding in Richmond County Supreme Court since January 2006. Justice McMahon has a predominately civil caseload but also sits in Criminal Court on weekends in the arraignment part. Previously, she had been elected in November 2002 to New York City Civil Court and was also a court attorney to Justice John Leone and Justice Eric Vitaliano. Prior to working in the court system, she was a trial lawyer involved in complex tort litigation for the law firm of Julian and Schlesinger. She had attended Rutgers College of Pharmacy and practiced pharmacy for five years before attending New York Law School.

Thursday, April 22, 2010

In Flushing Savings Bank v. Chancay, Justice Schack threatens to sanction Flushing Savings Bank and its counsel for seeking an order of reference during a foreclosure action on a mortgage that had already been paid in full and satisfied.

In Emigrant Mtge. Co. Inc. v Corcione, Justice Spinner slams Emigrant Mtge. Co. and its counsel for "unconscionable, shocking or egregious" behavior with an extraordinary array of exemplary damages. These damages included the following:

(1) that Emigrant be forever barred and prohibited from collecting any of the claimed interest accrued on the loan between the date of default and March 1, 2010;

(2) that Emigrant be barred and prohibited from recovering any claimed legal fees and expenses as well as any and all claimed advances to date;

(3) that Emigrant 's debt be determined at this time to be no more than the principal balance of $ 301,721.58; and

(4) exemplary damages in the sum of $ 100,000.00, recoverable by Defendants from Emigrant .

In particular, Justice Skinner justifies his imposition of exemplary damages by citing, inter alia, the bad faith with which Plaintiff's counsel conducted itself during a foreclosure settlement conference. Justice Skinner in his decision cites a decidedly one-sided "Loan Modification Agreement" proffered by Emigrant's counsel which contained such provisions as follows:

(1) that Defendants would waive their right to reorganize under the US Bankruptcy Code and that the Defendants waive their right to the protection of the Bankruptcy stay as against Emigrant;

(2) waive of any claim, counterclaim, right of recoupment, affirmative defenses or set-off of any kind;

(3) waive of an jurisdictional defenses or any defenses based on Emigrant's failure to satisfy any conditions precedent;

(4) that any payments made pursuant to the agreement are made without prejudice to the loan acceleration or pending foreclosure and that payment shall not constitute a waiver of Emigrant's right to foreclose; and

(5) all payments are due on the first of the month without any grace period, and failure to pay would entitle Emigrant to immediately resume its foreclosure action.

Justice Spinner was particularly perturbed by the waiver of the right to seek relief under the Bankruptcy Code, and posited that such a waiver would be unenforceable and void as against public policy.

Justice Spinner has a track record of punishing banks for overreaching in the foreclosure context. In an extreme case, Spinner has been known to void mortgages altogether. See article in NY Post: Judge blasts bad bank, erases 525G debt

Friday, April 16, 2010

In Wells Fargo Bank v. Hunte, 2010 NY Slip Op 50637(U)(Sup. Ct. Kings County 2010), plaintiff's counsel never notified the Court that the mortgage had been satisfied and failed to discontinue the instant action with prejudice. Justice Schack discovered that the mortgage had been satisfied by personally searching the Automated City Register Information System (ACRIS) website of the Office of the City Register, New York City Department of Finance. Plaintiff's counsel, Peter G. Zavatsky, Esq., and his firm, Zavatsky, Mendelsohn & Levy, LLP, are being given an opportunity to be heard as to why the Court should not sanction them for making a "frivolous motion," pursuant to 22 NYCRR §130-1.1.

On March 30, 2010, Fannie Mae issued an announcement (SVC-2010-05) which provided updates and clarifications to several loan servicing policies, including:

Document custodian requirements for government loan modifications

Foreclosure attorney fees for New Mexico and Vermont

Mortgage insurance cancellations on loan modifications

Foreclosure actions in the name of MERS

Flat File layout for Payment Reduction Plan loans

Balloon mortgage loans with conditional modification option

Of particular interest to practitioners in the area of foreclosure defense are the provisions pertaining to MERS. Fannie Mae has mandated that MERS must not be named as a plaintiff in any foreclosure action on a mortgage loan owned or securitized by Fannie Mae. This is significant because it appears that Fannie Mae is acknowledging that MERS does not have the capacity or standing to bring foreclosure actions. This also tends to support the inference that MERS may not have the capacity to assign loans as is so often the case.

Why does Fannie Mae takes this stance? The answer to the question lies in the origin and function of MERS

MERS (short for Mortgage Electronic Recording System) was conceived and created by a tight-knit group of powerful mortgage industry insiders for the purpose of avoiding the fees local government require for the recording of mortgage assignments. The details of how MERs would work were not ironed out until mid-1996, and two years later MERS, Inc., incorporated in Delaware as a non-stock corporation owned by mortgage banking companies that made initial capital contributions ranging from $10,000 to $1,000,000. The primary goal of MERS was to lower costs for servicers, and among the first entities to utilize MERS extensively were none other than Fannie Mae and Freddie Mac.

Mortgage finance companies currently use the MERS' name to interact with the land title recording system (i.e. the county clerk) in one of two ways: either by recording MERS' name as an assignee, or by recording MERS' name as the original mortgagee. For instance, under the former recording strategy, the originating lender makes a traditional mortgage loan by lisiting itself as payee on the promissory note and as the mortgagee on the security instrument. The loan is the assigned to a seller for repackaging through securitization for investors. However, instead of recording the assignment to the seller or the trust that will ultimately own the loan, the originator pays MERS a fee to record an assignment to MERS in the county records. MERS' counsel maintains that MERS becomes a "mortgagee of record" even though its ownership of the mortgage is fictional.

Although MERS records an assignment in the real property records, the promissory note which creates the legal obligation to repay the debt is not negotiated to MERS--MERS is never the holder of the note. Everyone agrees that MERS is never entitled to receive a borrower's monthly payments, nor is MERs ever entitled to receive the proceeds of a foreclosure or deed of trust sale. MERS has no actual financial interest in any mortgage loan. MERS does not even provide lien releases of the mortgages it purports to own, instead referring title attorneys, refinancing lenders, and consumers to the loan's servicer. MERS' revenue comes, not from the repayment of the loan or the disposition of collateral, but from the fees that the originator and other mortgage finance companies pay to MERS. Once a loan is assigned to MERS, the public land title records no longer reveal who (or what) actually owns a lien on the property in question.

In addition to record keeping and recording system liaison roles, MERS has also become directly involved in consumer finance litigation. Historically, the owner of the mortgage loan, or a servicer hired to collect borrower payments, sues the homeowner in a forelcosure action. But, when MERS is listed in county records as the owner of a mortgage, courts have initially made the natural assumption that the appropriate plaintiff to bringing a foreclosure action is MERS. In order to move foreclosures along as quickly as possible, MERS has allowed actual mortgagees and loan assignees or their servicers to bring forelcosure actions in MERS' name, rather than in their own name. Thus, not only does the use of MERS' services allow financiers to avoid county recording taxes, it also allows them to list an obscure, apparently official institution as the instigator of a foreclosure.

By May of 2007, approximately 60 million loans had been recorded under MERS' name and more than half of the nation's existing residential loans are recorded under MERS' name. Not satisfied, MERS' CEO insisted that "[o]ur mission is to capture every mortgage loan in the country."

The collapse of the nation's subprime mortgage lending industry has prompted courts to take a fresh look at the legal foundations of MERS' role in the land title recording and home foreclosure system--particularly, whether MERS owns title to mortgages either as a mortgagee or as assignee; and whether MERS has standing to bring foreclosure actions. There appears to be a growing consensus among courts, and Fannie Mae in light of its recent announcement, that the answer to both of these questions is a resounding "no".

While the language in MERS boilerplate contracts is not particularly enlightening in answering these questions, basic economic principles of the law provide a simple answer to this puzzle. The American legal tradition looks to the economic realities of a transaction in determining whether a business is a secured creditor or mortgagee. The most familiar application of this principal is found in Article 9 of the UCC which construes transactions that pose as "leases" as disguised purchase money loans based on the economic realities underlying these so-called "lease." The UCC insists that the words used by the parties to a contract are not controlling when the words mischaracterize the underlying transaction. Mortgages are no different, and courts will not blindly enforce its boilerplate provisions when they have no basis in reality. MERS is not a mortgagee (or an assignee) simply because ink on paper makes this assertion--rather the law compels courts to look to the economic nature of the transaction to identify MERS' role.

The fundamental reality is that MERS is not a mortgagee with respect to any loan registered on its database. MERS does not fund any loans. No homeowner promises to pay MERS any money. MERS is never the holder of the note or mortgage. MERS is never entitled to receive the proceeds of a foreclosure sale--even when it commences foreclosure actions in its own name.

Therefore, it should be no surprise that Fannie Mae has mandated that MERS must not be named as a plaintiff in any foreclosure action on a mortgage loan which Fannie Mae owns or has securitized.

LOS ANGELES – A record number of U.S. homes were lost to foreclosure in the first three months of this year, a sign banks are starting to wade through the backlog of troubled home loans at a faster pace, according to a new report.

Friday, April 9, 2010

By: Brittany Dunn

There are thousands of troubled mortgages in need of modification, but some think there is a conflict of interest that may be preventing large mortgage companies from voluntarily offering modification services.

Many large mortgage companies own second mortgages on the same homes that they service, but these secondary mortgages are an investment, potentially creating a conflict of interest. In hopes of eliminating this issue, House Reps. Brad Miller (D-North Carolina) and Keith Ellison (D-Minnesota), both members of the financial services committee, have introduced the Mortgage Servicing Conflict of Interest Elimination Act.

Two-thirds of all distressed mortgages are now serviced by the four largest banks — Bank of America, Wells Fargo, Chase, and Citibank. And these same banks also own about $477 in second liens.
If enacted, the new legislation would prohibit mortgage servicers from owning debt secured by a home that secures a mortgage they service.
“Servicers are required to act in the best interests of the investors who own the mortgages,” Miller said. “In many, those four banks hold interests in other debt secured by the same home that would be affected by a decision to modify the mortgage or to foreclose, placing the banks’ interests in irreconcilable conflict with the interests of investors.”

Ellison said this obvious conflict of interest between investors and servicers may well be a factor in the failure of servicers to modify mortgages voluntarily.

The bill would give servicers a reasonable amount of time to divest themselves either of any interests in home mortgages or of the authority to services mortgages. The likely outcome would be that the four biggest banks would “spin off” their mortgage servicing business, which would resolve the conflict of interest and result in smaller, less complex banks.

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